How to use Bloomberg - FX Market Essentials

Welcome to the FX fundamentals session of the Bloomberg Essential Online Training Program. My name is Justin, and I am the FX specialist on the LX (ph) help desk. So today we’ll be walking through some of the key screens FX players like to look at. We’ll get in and take a look at some of the high-quality rates that – provided on Bloomberg. We’re also take a look at some screens that you can look at to sort of monitor spot rates all across the world.

    So the first screen we want to discuss is the FXIP home page for currencies. So all you have to do to get there is simply type in FXIP in the top left hand corner of the Bloomberg window in the command line. FXIP. Hit enter, or go. FXIP essentially launches our home base for all FX rates. What you’ll notice how the screen is laid out is on the left hand side you have sort of all your countries, as well as regions. Right now we’re currently on the G-10 – currently just looking at G-10 rates. In the main sort of body of the screen, you’ll notice we have the FX spot rates, which are commonly reference by all sort of different market players across the G-10 or Group of Ten nations.

    Going from left to right, we have the deposit rates. Obviously interest rates are a key sort of – it’s a cornerstone in the FX markets, so we list three-month deposit rates to the right. We also list 10-year bond yield benchmarks for each country so you get a sense of where yields are trading in respective countries. And then finally, we list the equity indices to the right just to give you a sense of what the stock markets are doing in the respective countries.

    Now a key – some other key points about the screen is that directly below these rates we have the DXY index, which is essentially the dollar index, and it tracks the performance of the basket of the US dollar against a host of other major currencies. Directly below the chart we have FX news and research, which flashes relevant headlines in real time on all things related to the FX market. And that’s something we’ll explore in a short while, how you can see sort of relevant news on the FX markets.

    But before we move on from the screen, let’s sort of take a look at some of the other tabs that the portal has to offer. Option 91, FX forwards up here, if we select it, will actually display a forward term structure of various G-10 currency pairs. So what we’re looking at on the screen is essentially the relevant forward exchange rates as of today, as of right now, that are ticking real time that one could use to buy or sell a specific currency for delivery at a specific date in the future.

    So for example, under euro USD 1Y, this essentially is telling us – well, in terms of points that what is the rate that we could buy or sell euros for delivery in one year time. FX options and volatility as well under Option 92 will show you – give you a sense of the FX options market. So some key things people would like to see is essentially what is the realized volatility of the FX pairs, as well as the implied volatility quoted by the markets used to price options. So we’ll get into this in a little more detail in a little bit, but right now the goal of FXIP is to provide an overview of the FX markets.

    We also list relevant economic data under option 93 so you can get a sense of the fundamentals of the actual country which do influence the movement of FX rates. So this obviously is a key tie-in to the FX market, and anyone who trades FX or just needs to get a sense of the economic health of various countries can just come right here and just take a look at a bird’s eye view of the most relevant economic indicators. So this is FXIP at a glance. Again, a home page and sort of a bird’s eye view of what’s going on in the markets.

    Now let’s take a deeper dive into the currencies and take a look at the currency ranker screen, which is a very popular screen amongst many of our clients. If we key in the code WCRS in the top left for world currency ranker, you’ll notice the first option that appears on my screen is world currency ranker. So let’s just click on that to load up the screen.

    WCRS is essentially – its function is implied by its name. So world currency ranker shows you what are the relative rankings of various currency pairs for your given basket, specified up in the top middle, for various metrics. Now the screen will by default load up total return, as you can see on the left hand side. And all your options and all your  metrics that you want to rank can be selected from the left hand side menu. So we can click on interest rates and see what – how the interest rates stack up across our basket of G-10 as of the current recording, as of today.

    So if we back to the returns, again, the default was to show the total return on various currency pairs within the G-10. So as you can see to the right in the body of the screen, you’ll notice Swiss franc, for example, has the greatest total return against the dollar, mind you. So the base currency can be selected from the top right over the month of March, from 03/01/2012 to 03/30/2012. The worst performer, conversely, was the Australian dollar against the US dollar. So if you held Aussie dollar against US dollar, you’d probably incur a loss of 3.86 percent against the US dollar.

    So WCRC, again, is a great tool to sort of give you a quick glance at what’s been going on historically at the markets. FXIP gives you a bird’s eye view of what’s going on right now, but WCRS gives you a sense of what’s been happening over various time intervals. Now I just want to show you that you can obviously change the basket. If you were interested in Latin American currencies, select option 12. It’ll change the universe of currencies that you’re observing. Again, these are all currencies against the US dollar.

    Another interesting feature of WCRS which is relatively new is our time series. So you can actually visually see the returns of various currencies on the right hand side over time. A couple of other key points about this screen that’s important to note is on the left hand side you can also see some fundamental drivers of currencies.

    So one example is option 240 on the left. If we click on this gray option, let’s change our basket for a second and go back to the G-10. You can actually see how overvalued or undervalued currencies are in the context of purchasing power parity. So purchasing power parity, or PPP as it’s known, is a fundamental look at whether or not a currency is overvalued or undervalued given the relative price levels within – of goods within each country.
   
    So based on this ranking, we can actually see that from our base period of January 1, 1982 to June 30, 2000, the Australian dollar was extremely overvalued against the US dollar at roughly 33.6 percent. So this kind of gives you an idea, and also helps you with idea generation in terms, okay, maybe I think the Australian dollar’s overvalued, so maybe I want to sell it. Because the theory holds that in the long run currencies should basically trade at the relative price levels of like goods in each country.

    So another interesting feature of the screen before we move on is the carry trade. If – if you were interested in carry trade performance, which essentially is borrowing in a low yielding currency to fund a higher yielding currency and earning that differential in interest rates, you can actually get a sense of what has been the best or worst performing carry trades over a set period of time.

    So one way we can play around with the screen is if we want to look back maybe, let’s go back to the last decade if we key in 2002, base currency is dollars, and – again, we’re looking at the G-10 basket. Based on this set up here, it looks like shorting the dollar to fund a New Zealand dollar, a long position, would give us an incredibly high return of like 173 percent. So this is sort of a cool feature and gives you a sense of what trades performed well in the FX markets and sort of a great idea generation tool for traders and analysts alike.

    So WCRS gives you a good historical perspective on currency performance, but what if you were concerned about the now? So if you wanted to track currency pairs in real time, we have – we have a better solution in terms of real-time data for you. So the first thing you want to do is type in the code WCR. It’s just WCRS without the S. And if you go to WCR, it’s essentially going to load a real-time monitor that’s customizable that allows you to track currencies on an intraday basis. So traders and active watchers of the currency markets, this is going to be a valuable screen.

    Again, the screen is sort of set up the way other FX screens are. On the top in red you have sort of settings that allow you to customize the screen. You can edit the currency basket we’re looking at. For the time being, again, let’s just stick with the G-10. Now what the screen is going to do is – right now we have all of the G-10 symbols, the ISO codes, on the left hand side. We have the time of last update, and then we have the bid and the offer ticking in real time. Every time it ticks it’ll show up in white so you know that’s a live market rate. And then we have obviously the change on day in terms of percentage, and then the open high, low and the close. So these are all very important indicators to sort of judge where a currency is trading sorta intraday.

    Now on a similar note, if you’re looking for a little more customizability and sort of trying to move away from just looking at spot rates, we have another tool that’s very valuable in terms of looking at different aspects of the FX market. And that’s – that screen is going to be the XDSH screen. So if you type XDSH in the top left hand corner, hit enter or go, XDSH is going to load up an extremely customizable view of the FX market. So what we can do right now – you’ll notice the first thing is that, again, we’re looking at the G-10 currencies. And currently the way my view is set up is that we’re looking at implied volatility of the FX pairs going out into the future. So implied volatility is obviously a very important component of options trading.

    So this particular review would be useful for an FX options trader, but you don’t have to work with implied volatilities if you don’t want to. So the way you can customize this is if you go to option 1 views in the top left, if you select browse views, we’ll actually have a couple of different sample views that are already pre-built for you that you can check out. So there’s a ton over here on the left hand side you can choose from. A lot of these custom ones have to do with realized and implied vol. Very useful if you’re an options trader. So there are definitely a good amount of views you can choose from.

    Some of the more common views that you might want to look at is we have technicals. So if you’re a trader or like to do technical analysis, you can set up XDSH to have various pivot levels and key sort of technical factors that alert you to when a signal has reached and potentially generate a buy or sell signal depending on your preferences. So I’m going to load this view up just so we can take a look. And you can see in this particular view, the technicals view, we’re looking at a series of expanded majors, so things outside the G-10, outside of the pound – British pound, euro, New Zealand dollar, Australian dollar. We have now Mexican peso. In row 20, we have some of the Latam currencies, as well as Brazilian real, and just a bunch of sort of currencies that traders may care about.

    So you’ll notice over here again we retain the spot column, percentage change on day. We also have a heat nap (ph) which is useful if you like to look at things graphically in terms how has the currency performed over the day, how far out has it gone up, how far has it gone down. We have the MACD signal, which is a popular technical – moving average convergence divergence. We have the RSI, Bollinger bands, and all sort of other common technical indicators a trader would actually care about.

    So the great thing about this screen is it’s actually color coded so you can actually get a sense of – you don’t have to dig through the numbers and figure out if it a number’s up or down. This particular screen helps one quickly identify opportunities in the FX market. So that’s sort of the benefit of XDSH over WCR, although WCR is good in terms of just giving you a simple view of live spot rates.

    Now changing gears a little bit, one of the things you’ll notice is obviously – the biggest question you’re going to ask is where do we get our FX prices from. Foreign exchange is the largest over-the-counter market in the world. So obviously the prices don’t trade freely on the exchange. They’re not freely observable on the exchange. So Bloomberg’s strength is really in the fact that we get numerous contributions from high-quality institutions, brokers and banks on various FX pairs.
   
    Now to see where all the contributions are coming from, let’s first load up an FX pair. So if we type in EUR, hit F11 for the currency key, and then type in the code ALLQ, ALLQ stands for all quotes. So what we’re going to do by running this command is see who’s actually providing us quotes and what are the quotes for euro dollar – for the euro dollar currency pair. So if we type EUR currency key, ALLQ, hit enter, again, it’s going to take us to this sort of great market view of what’s going on, who’s quoting what for the euro dollar pair.

    Now the way the screen is broken down is fairly straightforward. You can toggle the currency pair in the amber field in the top left hand corner. Now you’ll notice in the body of the screen we have all of the bankers and brokers contributing their rates and the bid offers, as well as the time of last update, so you kind of know what quotes are stale, what are the most active. And this ALLQ screen is an invaluable screen to traders or investors looking to execute on the best price possible. So ALLQ – again, if we scroll down, in this case euro dollar is a very – well, it is the most liquid pair out there – has 123 sources on the bottom left, ou can see that here, that are quoting the euro dollar pair.

    On the right hand side you’ll notice we have the forward points. So this is, again, what we saw in FXIP with the forward currency term structure. Below that we have the realized volatility menu where you can actually see what is actual realized or historical volatility for various maturities. So you can see here that’s sort of – if we go out to 18 months, one year, there was a lot more volatility over that time period than of – as of recently over the last one to 24 hours.

    Now a couple of key points about this screen that you’re going to wonder about is what are these white sources on the top left hand corner here. What is the BGN, CMPN, BFIX (ph), as well as the last? Well, these are actually some Bloomberg exclusive pricing sources that are highly, highly valuable to FX players. And we’ll sort of take – we’ll go through them one by one.

    The BGN source, the first option here, is the Bloomberg Generic source. And what this – what this does is sort of provides an accurate market indication of where spreads are in the market. So right now you can see the spreads on euro dollar are extremely tight, about one pip. It’s one spot 33, 31, 33, 32. And this again, the BGN is sort of an algorithmic price that looks at all of the contributions we receive and sort of spits back out a market – fair market price. So if you actually called up a broker and asked for a quote on euro dollar spot, you’d probably get a quote very, very on par to the BGN source. So BGN is our highest quality FX rate. It sort of scans all the contributors that we have, scans the quotes, the time of last update, runs them through a proprietary algorithm, and spits back out a market-accurate price.

    Now the composite source directly below BGN is a little bit different. What it does is essentially scrapes all the pricing that have stars next to them. So these are listed as reliable contributions or contributors. And it’ll take the best bid and the best offer and display them right up here, so you can always know what is the highest bid and the lowest offer which you could buy or sell your FX pair. So it obviously gives you the best sort of insight into what is the best rate right now in the market that I could get for euro dollar.

    Conversely, BGN is more of a what is the most accurate right now in the market in terms of buffet (ph). I called up my broker and wanted a quote on euro dollar. The BGN is most likely going to be what they’re going to quote me over the phone. So that’s sort of the difference between BGN and CMPN. CMPN is, again, just best bid, start offer, out of all the starred contributors.

    Directly CMPN we have the Bloomberg Fixing. Now BFIX, as we like to call it, is sort of a function of the BGN price. And what it does is capture – it takes a snapshot of the BGN price at every 30-minute intervals throughout the day. So every day you’re going to have 48 fixings for every half an hour throughout the day, which many players like to mark-to-market their instruments. So BFIX is something we’ll jump into in just a second.

    Last update is sort of the last thing I want to discuss about the screen. All it does is show you the last upgrade price for all of the contributors on ALLQ. If we were looking at a less liquid currency, for example maybe euro South African rand, there might not be as many contributors. So the last update will sort of help quickly scan the list of who contributed the price last.

    Now let’s go from the BFIX, from what we just talked about, and sort of see where you can look at those half an hour, 30-minute fixings throughout the day. As the screen – as the source implies, BFIX, all you have to do is just type in BFIX, enter, at the top left hand corner of the screen, and it’s going to take you directly to the BFIX screen.

    Now BFIX, as I just mentioned, is again a snapshot of the BGN price at every 30 minutes throughout the day. This is useful for accountants, people who like to mark-to-market their instruments that are denominated in different currencies and they are simply looking for a benchmark price every day for which they can take that rate and compute the market value of their instrument. So BFIX, again, uses that high quality BGN rate and just basically stamps it at every 30 minutes, takes a snapshot, and gives you the price.

    So this is great because you can come here to sort of get a sense of how the pair has been doing over the day. The currency is able to be changed up on the top left hand corner. Currently we’re displaying the mid market. You can also back date this page to see what the historical 30-minute intervals were. So this is the extent of the BFIX page. And again, it’s very useful for people looking for consistency in the FX markets, which essentially trades 24 hours a day and five to six days out of the week. So that’s the BFIX screen.  

    So we’ve been pulling up a lot of currency pairs and sort of just finding them through different screens, but what if there’s a currency pair or an instrument looked to a specific currency that you’re interested in? At this point, I want to introduce the screen FXTF, which is essentially our FX ticker finder. And it’s going to be very useful for you, especially if you’re not very in tune with the FX markets and don’t know all the currency codes.

    So let’s run FXTF, top left hand corner of our screen, hit enter, and you can see we’ve sort of broken down the FX tickers by region. So for example, let’s say we were looking at the southeast Asian region and we wanted to know what was the currency for Malaysia. Well, let’s go click on option 3 under Asia Pac for southeast Asia. And you’ll notice that Malaysia is actually the Malaysian ringgit right here, so option 8.

    If we further drill down into option 8, you can actually see that we have categorized all different types of instruments related to the ringgit into various easy to find categories. So for example, options 2 to 4 will show you FX currency fixings much like we saw in the BFIX. We also have FX forward rates for the Myanmar – I’m sorry, the Malaysian ringgit, in both on shore and non-deliverable forward as well.

    Interest rates under options 9 to 14, obviously very important for anyone who’s looking to invest in Malaysia. And then on the right we have more of the interest rate derivative products. So we’ll have caps and floors for interest rate options, as well as contributed broker quotes for swaps of all types.

    Now that you know how to find a currency pair as well as related instruments, the last two screens I want to cover in terms of the FX fundamentals are FX forecasts, as well as FX forward rates, which are a key part of the FX market. Now the great thing about Bloomberg is, again, we get a lot of data from high-quality institutions, as well as research firms.

    So one thing you might want to look at is, well, I want to know what the Street thinks about the forecast for euro dollar or a given currency pair at a future date. If you’d like to see that, the screen you can go to is the FXFC screen, which is FX forecast. If you hit enter, it’s going to take you to contributed quotes for various forecasts for various currency pairs around the world. So FXFC is sort of a great insight into what the Street thinks the strength or weakness of currency pairs are going to be at various periods in the future.

    So let’s work with option 2, Japanese yen, just to mix it a up little bit. As you can see, we have a row for forecast and then a row for forward. We’ll talk about forwards directly after this screen and get a little more into what a forward is. But for now, we’ll look at the forecast. So right now the current level of spot for dollar yen is currently 83. Now as we can see, going across from left to right, we’re going to go from Q2 of 2012 all the way out to 2016. So we actually get forecasts contributed all the way out to 2016, which is a pretty cool thing to see.

    Now looking back at dollar yen, spot is currently at 83 yen per dollar. If we move out, the forecasts actually go numerically up, which means that the Street thinks, or the median average of the contributed forecasts think that the yen is going to weaken against the dollar. Now if you want some more transparency into these numbers, you can essentially click on the option 2, Japanese yen link highlighted in blue. And you can see it’s going to take you to another list of various contributors, as well as their forecasts. So you can actually get a sense of the individual contributions and what various banks and institutions think the value of dollar yen is going to do.

    Within this screen we also give relevant statistics on the group of contributors. So you can see the median. Again, this is what we display on the main page of FXFC. The average, the high, and the low forecasts, and then again, the current forward. Now this screen allows you to get a good sense of who thinks dollar yen is going where. And again, it’ll sort of help you guide your thoughts on – on investing in the currency markets, or if you’re just looking at analysis, you can sort of get sort of a second opinion on what the dollar rate is going to do.

    The last feature about FXFC I want to point your attention to is the chart feature on the top left hand corner. If you click on this, it’ll actually show you what is the median forecast of dollar yen going out into various quarters, as well as the current forward price for dollar yen at various quarters in the future. And then in the purple line here we have the actual historical rate for the dollar yen spot rate. So it kind of gives you a good market picture of what the Street thinks is going to happen versus what the froward thinks – what the forward market implies dollar yen will do.

    Now the – one of the second to last screens I’m going to show you is the forward screen, which is, again, a very key screen for anybody looking to transact in the forward foreign exchange market. Now the screen for forward is essentially FRD, enter. FRD is going to show you the forward term structure for your given FX pricing source. So just like spot, we have various brokers contributing FX forward rates, or rates at which you can transact today for exchange at some date in the future.

    Now the way the screen is laid out, again, is we have the red toolbar to customize the settings of the page. You can also export the data into Excel versus option 1 actions. The currency pair is toggleable via these orange inputtable fields, so we can change it up. If you wanted to look at euro Swiss franc, just type in EURCHF. And again, we’re looking at the BGN source, the high-quality Bloomberg generic.

    Now the main body of the screen is going to be on the left hand side over here. All this data is going to be the FX forward term structure for euro Swiss franc. So for example, if we want to look at what the cost is for euro Swiss franc for delivery or exchange in one month’s time, we’ll come to the 1M tenor. We’ll look at the associated date on which this trade would settle, and then we can actually have the bid offer forward rates for the current one month euro Swiss franc forward rate.

    And again, if you right-click on this option, you’ll see the ticker for this is EURCHF 1M BGN currency. If you click the ALLQ button, it takes you back to that screen where we saw all quotes for FX spot, but this time it’s going to be for the forward rate, or for the one month euro Swiss forward rate, to be exact.

    Now what happens if you want to buy or sell currencies in the forward market that don’t exactly fall in any of these round maturities? So what if we were looking at buying euro and selling Swiss franc in between one month and two month? Well, all you’d have to do is come into the broken date (ph) section on the top right and either plug in the number of days to maturity or the actual calendar date to the right.

    So say we wanted to buy euro and sell Swiss franc that matured 35 days forward. All you would have to do is key in 35 days under the days field, hit enter, and FRD will correctly interpolate for the 35-day forward. All it does is essentially takes the one month and the two month forward rate and linearly interpolates for the fair 35-day rate.

    Now directly below the broken date section, we also have forward forwards. Forward forwards allow you to buy and sell a currency on what we call the near leg, and then reverse position on the far leg. So more sophisticated users of FX forward and swaps will be familiar with this tool, and simply can key in their actual forward – first forward date and the second forward date. And the screen again will correctly calculate for the correct forward-forward swap given what’s displayed on the left hand side over here.
   
    The last feature I really want to get into that’s available on FRD is you can actually graph the forward term structure of FX rates. So instead of sort of just looking at all these numbers here and trying to figure if euro Swiss is cheaper or more expensive in the forward market, if you go to Option 21, forward curve, show chart, you can actually see what the forward term structure looks like in a graphical format. So right now if we select the outrights, we can actually see that euro Swiss franc is downward sloping over the next 10 to 30 years. So this is the extent of FRD and sort of the overview of FX fundamentals.

    Really the last screen I do want to show you – actually the last two, which will help you sort of just navigate the Bloomberg in terms of the FX market, are two things. So one is the ability to change your custom default settings for FX prices. That default screen for FX rates are going to be located on the XDF screen, foreign exchange sources. So right now the way the screen is set up, we have use BGN as default source where available. So when this is checked off, all the rates we load at the top of the screen, for example Swiss franc currency, are going to default to the BGN rate because we have BGN checked off.

    Now since FX trades 24 hours a day, there’s really no official close for the market. If you want Bloomberg to determine a closing price for the BGN, you can simply check off one of the trading days on the left hand side. So right now I have New York 17:00 o’clock. So if we look at the historical prices on dollar Swiss franc, those prices are going to be taken as a snapshot of the BGN price at 5 p.m. every day. And let me just show you that screen where you can see historical prices, which is the same across all asset classes on the Bloomberg. Just type in CHF, currency key HP, and it’ll show you the historical prices, the 5 p.m. BGN snapshot, of dollar Swiss franc. So that’s sort of the value of XDF.

    You can obviously customize the contributor. You come down here. You simply type in the currency pair. For example, dollar South African rand. And under the first box, if you hit the question mark you can actually see all the brokers contributing pricing for dollar Swiss African rand – sorry, South African rand. And again, you can just select it and it’ll – once you hit this and then hit enter, this will allow dollar South African rand to pull up by using the Bank of America source. And that’s essentially XDF is really the cornerstone of FX pricing default on the screen – on the system.

    Now the last screen I do want to show you again, we’ve ran through many functions but really have only covered a fraction of what we have to offer on the Bloomberg, is going to be the FXDV screen. FXDV is going to be sort of your reminder or cheat sheet page that allows you to access FX functions we reviewed today, as well as FX functions that you’ve yet to discover. So we do offer a good amount of functionality and tools in the derivatives space. You can also price options up.

    You’ll see option 1 here for OVML, which will allow you to price bespoke options and derivative products on FX. We also have more in-depth volatility analysis if you’re interested in the options market. And then again, under forward and futures, some of the things we went over today. FRD, which is sort of an introduction to contributed forward rates on the screen. And then moving to the top right, where we had more of the monitors for FX spot, FXIP again, which is your home page, and WCRS again, which is a great idea generation sort of historical overview page for FX pairs.

    So this concludes the FX fundamentals tutorial. Again, should you have any further questions, feel free to hit the help key twice and someone well-versed in foreign exchange will be able to help you with any questions you have.